Franklin Electric Narrows Guidance

Franklin Electric (FELE) reported 3rd Quarter September 2017 earnings of $0.53 per share on revenue of $311.1 million. The consensus earnings estimate was $0.52 per share on revenue of $310.9 million. Revenue grew 29.8% on a year-over-year basis.

The company said it expects 2017 earnings of $1.88 to $1.92 per share. The company's previous guidance was earnings of $1.87 to $1.97 per share and the current consensus earnings estimate is $1.90 per share for the year ending December 31, 2017.

Franklin Electric Co along with its subsidiaries designs,
manufactures and distributes water and fuel pumping systems, composed of
submersible motors, pumps, electronic controls and related parts and equipment.

Franklin Electric Reports Third Quarter 2017 Sales and Earnings

Franklin Electric Co., Inc. (FELE) reported third quarter 2017 GAAP fully diluted earnings per share (EPS) of $0.52, versus a GAAP fully diluted EPS in the third quarter 2016 of $0.50, an increase of 4 percent. In the third quarter of 2017, the Companys EPS was $0.53 before restructuring compared to 2016 third quarter EPS of $0.48 before restructuring, a 10 percent increase (see table below for a reconciliation of GAAP EPS to the EPS before restructuring).

Third quarter 2017 sales were $311.1 million, an increase of $71.3 million or 30 percent compared to 2016 third quarter sales of $239.8 million. The sales increase was primarily from acquisition related sales, as well as sales volume and price increases. The Companys organic sales growth was 8 percent. Foreign currency translation increased sales less than 1 percent.

"We are pleased with our third quarter results which include record net sales and earnings per share for any third quarter in our Companys history. Our Fueling Systems and Water Systems business in the U.S. and Canada grew organically by 10 and 11 percent, respectively. Our consolidated operating income before restructuring grew by 9 percent and our earnings per share before restructuring grew by 10 percent versus the same quarter prior year. We also experienced strong growth in our Water Systems businesses in Europe, the Middle East and Africa primarily as a result of market share gains of pump products in Europe and continued strength in Turkey. Our distribution segment turned in solid sales results despite supply chain disruptions."

Key Performance Indicators:

Earnings Before and After Restructuring

For the Third Quarter

(in millions)

2017

2016

Change

Net Income attributable to FE Co., Inc. Reported

$

24.5

$

23.7

3

%

Allocated Undistributed Earnings

$

(0.2 )

$

(0.3

)

Earnings for EPS Calculations

$

24.3

$

23.4

4

%

Restructuring (before tax):

$

1.0

$

(1.7

)

Restructuring, net of tax:

$

0.6

$

(1.0

)

Earnings before Restructuring

$

24.9

$

22.4

11

%

Earnings Per Share

For the Third Quarter

Before and After Restructuring

2017

2016

Change

(in millions except Earnings Per Share)

Average Fully Diluted Shares Outstanding

47.0

46.9

0

%

Fully Diluted Earnings Per Share ("EPS") Reported

$

0.52

$

0.50

4

%

Restructuring Per Share, net of tax

$

0.01

$

(0.02 )

Fully Diluted EPS before Restructuring

$

0.53

$

0.48

10

%

Net Sales

United States Latin

Europe,

Asia

Total

Middle

(in millions)

& Canada

America

East & Africa Pacific

Water

Fueling

Distribution Other/Elims Consolidated

Q3 2016

$87.5

$35.0

$39.5

$20.0

$182.0

$57.8

$0.0

$0.0

$239.8

Q3 2017

$97.5

$32.7

$47.0

$19.3

$196.5

$63.5

$68.1

($17.0 )

$311.1

Change

$10.0

($2.3 )

$7.5

($0.7 )

$14.5

$5.7

$68.1

($17.0 )

$71.3

% Change

11

%

-7

%

19

%

-4

%

8

%

10

%

30

%

Foreign currency translation $0.3

$0.3

($0.4

)

$0.1

$0.3

$0.6

% Change

0

%

0

%

-1

%

0

%

0

%

1

%

Volume/Price

$9.7

($2.6 )

$7.9

($0.8 )

$14.2

$5.1

% Change

11

%

-7

%

20

%

-4

%

8

%

9

%

Operating Income and Margins

(in millions)

For the Third Quarter 2017

Water

Fueling

Distribution

Other/Elims

Consolidated

Operating Income / (Loss)

$ 28.3

$

17.1

$

2.0

$

(15.6 )

$

31.8

% Operating Income To Net Sales

14.4 %

26.9 %

2.9

%

10.2 %

Restructuring

$ 1.0

$

-

$

-

$

-

$

1.0

Operating Income/(Loss) before Restructuring

$ 29.3

$

17.1

$

2.0

$

(15.6 )

$

32.8

% Operating Income to Net Sales Before Restructuring

14.9 %

26.9 %

2.9

%

10.5 %

Operating Income and Margins

(in millions)

For the Third Quarter 2016

Water

Fueling

Distribution

Other/Elims

Consolidated

Operating Income / (Loss)

$ 30.0

$

15.2

$

-

$

(13.4 )

$

31.8

% Operating Income To Net Sales

16.5 %

26.3 %

13.3 %

Restructuring

$ (1.8 ) $

0.1

$

-

$

-

$

(1.7 )

Operating Income/(Loss) before Restructuring

$ 28.2

$

15.3

$

-

$

(13.4 )

$

30.1

% Operating Income to Net Sales Before Restructuring

15.5 %

26.5 %

12.6 %

Water Systems

Water Systems sales were $196.5 million in the third quarter 2017, an increase of $14.5 million or about 8 percent versus the third quarter 2016 sales of $182.0 million. Water Systems sales increased by $0.3 million or less than 1 percent in the quarter due to foreign currency translation. Water Systems organic sales were up about 8 percent compared to the third quarter 2016.

Water Systems sales in the U.S. and Canada were up about 11 percent compared to the prior year third quarter. Sales of Pioneer branded dewatering equipment increased by about 90 percent in the third quarter when compared to the prior year resulting from the continued diversification of customers and strengthening in U.S. oil and gas end markets. Sales of groundwater pumping equipment increased about 10 percent on broad based strength in both residential and agricultural systems. Sales of other surface pumping equipment increased by 4 percent primarily in irrigation and agricultural related products.

Water Systems sales in markets outside the U.S. and Canada overall increased by about 5 percent. The impact of foreign currency translation was not significant. International Water Systems sales were led by improved sales in Europe, including higher sales of Pioneer branded equipment, and the Middle East and Africa, but were offset by lower sales in the Latin American and Asia Pacific markets in the quarter compared to last year.

Water Systems operating income was $28.3 million in the third quarter 2017, down $1.7 million or 6 percent versus the third quarter 2016 and operating income margin was 14.4 percent compared to the 16.5 percent in the third quarter 2016. Water Systems operating income before restructuring was $29.3 million in the third quarter 2017, up $1.1 million or about 4 percent versus the third quarter 2016 and operating income margin before restructuring was 14.9 percent compared to the 15.5 percent in the third quarter 2016. The decline in operating income margin is primarily related to product sales mix shifts and higher raw material costs.

Fueling Systems

Fueling Systems sales were a record $63.5 million in the third quarter 2017, an increase of $5.7 million or about 10 percent versus the third quarter 2016 sales of $57.8 million. The impact of foreign currency translation in the quarter was not significant.

Fueling Systems sales in the U.S. and Canada grew by about 10 percent during the quarter. The increase was across all product lines, with particular strength in piping and containment systems. Outside of the U.S. and Canada, Fueling Systems revenues grew by about 18 percent, led by stronger sales in Europe and Asia.

Fueling Systems operating income was $17.1 million in the third quarter of 2017, up $1.9 million or about 13 percent compared to $15.2 million in the third quarter of 2016 and third quarter operating income margin was 26.9 percent, an increase of 60 basis points from the 26.3 percent of net sales in the third quarter of 2016.

Distribution

Distribution sales were $68.1 million in the third quarter 2017. Management estimates third quarter Distribution sales declined by about 6 percent from the third quarter of 2016 primarily driven by supply chain disruptions and weak end market conditions in the Southeast region of the United States.

Distribution operating income was $2.0 million in the third quarter of 2017 and the third quarter operating income margin was 2.9 percent.

Overall

The Companys consolidated gross profit was $103.8 million for the third quarter of 2017, an increase of $18.3 million, or about 21 percent, from the third quarter of 2016 gross profit of $85.5 million. The gross profit as a percent of net sales was 33.4 percent in the third quarter of 2017 and decreased about 220 basis points versus 35.6 percent during the third quarter 2016. The gross profit increase was primarily due to higher sales. The decline in gross profit margin percentage is partially attributable to the inclusion of the Distribution segment which impacted the margin by 70 basis points and the balance is due to product and geographic sales mix shifts and higher raw material costs.

Selling, general, and administrative (SG&A) expenses were $71.0 million in the third quarter of 2017 compared to $55.4 million in the third quarter of the prior year, an increase of $15.6 million or about 28 percent. The increase in SG&A expenses from acquired businesses were $15.8 million. Excluding the acquired entities, the Companys SG&A expenses in the third quarter of 2017 were flat to last year.

Restructuring expenses for the third quarter of 2017 were $1.0 million, reduced diluted earnings per share by approximately $0.01 and were related to ongoing efforts in Brazil. Restructuring for the third quarter of 2016 resulted in income of $1.7 million and increased diluted earnings per share by $0.02 principally due to a gain on the sale of property in Brazil.

The Company ended the third quarter of 2017 with a cash balance of about $60 million versus about $104 million at the end of 2016, down primarily due to acquisitions and increased working capital. Inventory levels at the end of the third quarter 2017 were $301 million versus year end 2016 of $203 million. About $65 million of the inventory increase is due to the Distribution segment acquisitions.

Commenting on the outlook, Mr. Sengstack said:

"We expect our Fueling Systems momentum from the third quarter to continue and are confident in the strength of the U.S. and Canada water end markets as we enter the fourth quarter of 2017. However, we remain cautious about certain international water end markets including Asia Pacific and Latin America. As a result, we are narrowing our full year 2017 adjusted earnings per share guidance to $1.88 to $1.92."

A conference call to review earnings and other developments in the business will commence at 9:00 am EDT. The third quarter 2017 earnings call will be available via a live webcast. The webcast will be available in a listen only mode by going to:

https://edge.media-server.com/m6/p/tmfc9j2d

If you intend to ask questions during the call, please dial in using 877.643.7158 for domestic calls and 914.495.8565 for international calls. The conference ID is: 96637193.

A replay of the conference call will be available Tuesday, October 24, 2017 at 12:00 noon EDT through noon EDT on Tuesday, October 31, 2017, by dialing 855.859.2056 for domestic calls and 404.537.3406 for international calls. The replay passcode is: 96637193.

Franklin Electric is a global leader in the production and marketing of systems and components for the movement of water and fuel. Recognized as a technical leader in its products and services, Franklin Electric serves customers around the world in residential, commercial, agricultural, industrial, municipal, and fueling applications.

FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

Third Quarter Ended

Nine Months Ended

September 30,

October 1,

September 30,

October 1,

2017

2016

2017

2016

Net sales

$

311,113

$

239,755

$

836,714

$

710,266

Cost of sales

207,271

154,286

554,303

459,883

Gross profit

103,842

85,469

282,411

250,383

Selling, general, and administrative expenses

70,986

55,373

196,275

165,672

Restructuring (income)/expense

1,009

(1,715

)

1,575

(850

)

Operating income

31,847

31,811

84,561

85,561

Interest expense

(2,297

)

(1,983

)

(8,055

)

(6,631

)

Other income, net

574

1,446

6,814

2,787

Foreign exchange income

193

399

296

637

Income before income taxes

30,317

31,673

83,616

82,354

Income tax expense

5,769

7,926

12,890

20,840

Net income

$

24,548

$

23,747

$

70,726

$

61,514

Less:

Net income attributable to noncontrolling interests

(78

)

(83

)

(617

)

(411

)

Net income attributable to Franklin Electric Co., Inc.

$

24,470

$

23,664

$

70,109

$

61,103

Income per share:

Basic

$

0.52

$

0.51

$

1.50

$

1.29

Diluted

$

0.52

$

0.50

$

1.48

$

1.28

FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

September 30,

December 31,

2017

2016

ASSETS

Cash and equivalents

$

60,129

$

104,331

Receivables

176,286

145,999

Inventories

301,374

203,471

Other current assets

44,462

30,018

Total current assets

582,251

483,819

Property, plant, and equipment, net

213,206

196,137

Goodwill and other assets

384,036

359,949

Total assets

$

1,179,493

$

1,039,905

LIABILITIES AND EQUITY

Accounts payable

$

76,163

$

63,927

Accrued expenses and other current liabilities

67,898

60,119

Current maturities of long-term debt and short-term borrowings

104,081

33,715

Total current liabilities

248,142

157,761

Long-term debt

125,608

156,544

Deferred income taxes

42,776

40,460

Employee benefit plans

42,180

45,307

Other long-term liabilities

18,653

17,093

Redeemable noncontrolling interest

1,871

7,652

Total equity

700,263

615,088

Total liabilities and equity

$

1,179,493

$

1,039,905

FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

September 30,

October 1,

2017

2016

Cash flows from operating activities:

Net income

$

70,726

$

61,514

Adjustments to reconcile net income to net

cash flows from operating activities:

Depreciation and amortization

28,418

26,752

Share-based compensation

6,043

5,912

Gain on equity investment

(5,165

)

-

Other

(2,444

)

2,148

Changes in assets and liabilities:

Receivables

8,449

(22,088 )

Inventory

(35,758 )

(14,910 )

Accounts payable and accrued expenses

(17,942 )

9,333

Other

(11,963 )

2,204

Net cash flows from operating activities

40,364

70,865

Cash flows from investing activities:

Additions to property, plant, and equipment

(22,517 )

(30,109 )

Proceeds from sale of property, plant, and equipment

207

5,839

Acquisitions and investments

(51,783 )

(1,007

)

Other investing activities

149

174

Net cash flows from investing activities

(73,944 )

(25,103 )

Cash flows from financing activities:

Change in debt

5,594

(30,626 )

Proceeds from issuance of common stock

3,770

3,192

Purchases of common stock

(3,263

)

(6,193

)

Dividends paid

(15,245 )

(14,483 )

Purchase of redeemable non-controlling shares

(5,047

)

-

Net cash flows from financing activities

(14,191 )

(48,110 )

Effect of exchange rate changes on cash

3,569

(232

)

Net change in cash and equivalents

(44,202 )

(2,580

)

Cash and equivalents at beginning of period

104,331

81,561

Cash and equivalents at end of period

$

60,129

$

78,981

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including those relating to market conditions or the Companys financial results, costs, expenses or expense reductions, profit margins, inventory levels, foreign currency translation rates, liquidity expectations, business goals and sales growth, involve risks and uncertainties, including but not limited to, risks and uncertainties with respect to general economic and currency conditions, various conditions specific to the Companys business and industry, weather conditions, new housing starts, market demand, competitive factors, changes in distribution channels, supply constraints, effect of price increases, raw material costs, technology factors, integration of acquisitions, litigation, government and regulatory actions, the Companys accounting policies, future trends, and other risks which are detailed in the Companys Securities and Exchange Commission filings, included in Item 1A of Part I of the Companys Annual Report on Form 10-K for the fiscal year ending December 31, 2016, Exhibit 99.1 attached thereto and in Item 1A of Part II of the Companys Quarterly Reports on Form 10-Q. These risks and uncertainties may cause actual results to differ materially from those indicated by the forward-looking statements. All forward-looking statements made herein are based on information currently available, and the Company assumes no obligation to update any forward-looking statements.